China Offers Chance to Cash in on Green Energy

On top of the dynamics of China, politics plays a significant role in this environmental business.

Ni Jun, CDM director of Shanghai Yangtze Delta Investment Consulting Co., a Shanghai-based private consultancy on environmental business, said the biggest challenge for this business is political uncertainty. "The whole CDM idea is created by politics. If the international rules change, the whole industry will be reshaped. Now China has a lot of pressure to shoulder the climate responsibility too. However, I don't see it as too big an impact on our business. Even if China has the obligation in the future to take the emissions reduction quota, I see the domestic business becoming active."

In its report, the World Bank analyzed the key elements for a well-functioning carbon market: a competitive energy market; common, fungible units of measure; standardized reporting protocols of emissions data; and transferability of assets across boundaries.

'Clear Up the Mess'

Leigh Fitzgerald, a senior specialist at Arreon Carbon U.K., wrote an article a few months ago on chinadialogue.net, an environmental Web site that belongs to an independent, nonprofit organization based in London and Beijing.

"At the center of the [flexible] mechanism is an intricate regulatory system that ensures the project quality. Getting projects registered through the CDM process requires the support of both the developed and developing country host parties, verification by a certified third-party standards body, and the ultimate approval of the United Nations," he wrote. "Baseline emissions, what would have been emitted without CDM, must be clearly measurable and the project must be able to be strictly monitored. Finally, combinations of financial, investment, technological or common practice barriers must be strong enough to block the implementation of a project without CDM support."

However, the whole idea of carbon trading has received sharp criticism from some observers. George Monbiot, a British writer and activist, has suggested that carbon trading is simply "paying other people to clear up the mess we've made." Others have referred to "gift certificates for your conscience" in a "largely unregulated" market.

The authors of the World Bank Report concluded that while they recognize the enormous strength and potential of the market to achieve results, it would be wise not to assume the market will provide a painless, magical way to mitigate climate change. "A solution to the urgent problem of climate change will require sustained effort by all of us. Policy has a role, as does individual action by each of us."

For more information about Knowledge@Wharton, please click here.

To learn about companies at the forefront of China's energy sector, check out these videos on TheStreet.com TV:

"China Watch: Mailbag." TheStreet.com research associate Patrick Schultz explains why clean coal technology is a moneymaker and why Fuel Tech (FTEK Quote) will bring in the most cash.

"China Watch: Bucyrus." Schultz finds the best company you can invest in to make money off of the skyrocketing coal demand in China, Bucyrus (BUCY Quote).

"China Watch: Gushan Environmental Energy." China, energy and environmental friendliness -- three factors that make up one fun, speculative play in Gushan Environmental Energy (GU Quote).